Joe Mazumdar: Gold Mining Companies Too Good to Pass Up

Suffocated by staggering unemployment and economic woes, many
mining jurisdictions around the world are finding the nearly
$1,800/ounce gold too good to pass up. Joe Mazumdar, a senior
mining analyst with Haywood Securities in Vancouver, tells
The Gold Report
in this exclusive interview which projects are primed to see the
light of day in the face of rising gold prices and a dearth of
other industry.

The Gold Report:
What is your thesis for covering junior mining?

Joe Mazumdar:
I break out the sector into different stages: exploration,
development and production. In exploration, I look for a company
with a good geological concept or model such as
ATAC Resources Ltd. (TSX.V:ATC)
. When I looked at that company last year, it had a significant
land package, which is another big component. The company was
putting forward geological evidence backing up their concept of a
Carlin-type deposit in the Yukon, which nobody had actually found
before. The Yukon was getting a lot of activity, but the people
who were behind that play had been in the Yukon since the
mid-1960s which speaks to their on-the-ground experience. So in
the exploration space, I look for a proven geological model on a
significant land package attractive to a major/intermediate gold
company with a management team that is more than capable of
delivering on the catalysts.

For developers, I predominantly focus on companies that can
come into production within a three-year timeframe. I consider
geopolitical jurisdiction, but I compensate geopolitical risk
with some advantages in grade, cost or other factors. I like
plays in areas that are old mining districts that haven't been
touched in a long time. The rising gold price has brought people
back to these districts, which tend to be in less geopolitically
risky areas, such as Spain and the U.S. (Idaho, Michigan and
Nevada), among others.

Management is also very important because they have to bring
this project to fruition. They have to manage it. They have to
permit it. They have to develop a critical path. I want to know
how long the permit is going to take. When will they get the long
lead items? A good example would be
Midway Gold Corp. (TSX.V:MDW; NYSE.A:MDW)
, which has a portfolio of advanced exploration to development
projects in Nevada. Some (Pan, Goldrock, Midway) are of a size
that would be management to the more-than-capable management team
under Ken Brunk but it also holds an option on a potentially
large gold-only deposit, Spring Valley, where Barrick is earning
in.

Producers are not unlike the developers. I look for a growth
profile from perhaps 50 thousand ounces (Koz.) to 150 or 200 Koz.
within three years. A company that I'm looking at right now that
fits the profile is
Minera IRL Ltd. (
IRL
)
, which is looking to expand in Peru at the Ollachea Project and
in the Santa Cruz Province of Patagonia. The management team at
Minera IRL, I believe, is not only strong technically, they are
very well levered with their capacity to negotiate successfully
with local communities to permit development projects in Peru and
the new political paradigm related to the election of Ollanta
Humala as president.

TGR:
There are literally hundreds of junior exploration companies. How
do you break it down into 30 or so names that get on your
list?

JM:
Exploration companies are mostly run by geologists and most of
those guys aren't really interested in bringing anything into
production. They're interested in doing grassroots exploration,
which is currently an area of less interest to larger companies.
I'm looking for companies that are searching for assets with the
right people on the ground, a history of exploring for these
kinds of assets and a significant land package that would
interest a major. I'm looking for them to drill it and come out
with a resource to sink one's teeth into.

One example is
Carpathian Gold Inc. (
CPN
)
, which has a large gold rich copper porphyry with about 7
million ounces (Moz.) in global resource within the Golden
Quadrilateral of Romania. The area also hosts
Gabriel Resources Ltd.'s (TSX:GBU)
large Rosia Montana project (~16 Moz.) which, incidentally, has
recently acquired a critical archeological permit, derisking
somewhat the project's development timeline.

Revolution Resources Corp. (TSX:RV; OTCQX:RVRCF)
is in an area of the Carolina Slate Belt looking for analogs of
Romarco Minerals Inc.'s (
R
)
Haile Deposit, which has more than 4 Moz. It's an example of a
low geopolitical risk jurisdiction with high unemployment.
Romarco's done a great job of proving up those ounces. It is
proving to be even higher grade with underground potential.
Revolution is looking in the same belt for a similar deposit
style that would interest a major.

Astur Gold Corp. (TSX.V:AST)
is another example of a company in a less risky jurisdiction.
Astur is in the northwestern Spanish province of Asturias. The
area has more than 20% unemployment, far higher than the average
in the European Union. The area is an old coal mining district
that has been subsidized by the E.U. As those subsidies go away,
the unemployment rate will go up.

Astur Gold has taken advantage of that environment with its
acquisition of the Salave gold project that was previously unable
to be permitted. The company has proposed an underground
development project initially at an area that was previously
reneged on a permit for an open-pit by Rio Narcea Gold Mines-and
the deposits are still there. It's been drilled out for the
previous open pit design, but there's still some more drilling to
do for an underground deposit. The company wants to put in a
kilometer-long tunnel into the deposit under the trace of the old
open-pit. It's a good example of a company taking advantage of
the changing economic situation to bring a gold deposit into
development that wasn't previously considered possible.

TGR:
Are there some stories on this side of the ocean that fit your
thesis?

JM:
We have seen projects in Michigan and Idaho that people have told
me would never get permitted and nothing would happen. But I've
seen permitting in Michigan. The Kennecott Eagle project was
permitted. Areas that were off limits are now being reviewed. We
cover
Orvana Minerals Corp. (TSX:ORV)
that is looking to develop the Copperwood project, which
currently sits on about 3 billion pounds of copper in global
resource, in the upper peninsula of Michigan proximal to an old
copper mine operation, White Pine. The Company has had very
positive feedback regarding the project from the local
community.

Politics, I believe, is local. In areas of high unemployment,
whether it is Michigan, Idaho or the Carolinas (among others),
it's enticing to show residents that a project could bring jobs.
Some areas are also offering refunds on infrastructure capital
investments that could reduce overall capital expenditures.

The U.S. is very good jurisdiction for reviewing and bringing
up projects within old mining districts that were seen before as
non-starters but lie in areas of high unemployment, where
manufacturing has gone away.

TGR:
What about Nevada? Unemployment rates in Nevada haven't been
extraordinarily high, but it's certainly an old mining district
in a very safe jurisdiction.

JM:
Nevada housing prices were hit hard during the mortgage debacle.
Elko, which is one of the bases of the gold mining industry in
Nevada, is one of the places that have kept employment going.
Housing prices there have remained stable because the city has
some major and junior miners with a lot of exploration,
development projects and operations.

AuEx Ventures (TSX:XAU, de-listed) had 50% of the Long Canyon
deposit, located less than an hour outside of Elko, that was an
excellent grade for an open-pit heap leach deposit. The nature of
the deposit meant it would have low capital and operating costs.
AuEx was taken over by Fronteer Gold and then Fronteer Gold, in
turn, was taken over by
Newmont Mining Corp. (
NEM
)
. AuEx is a good story for Nevada coming back onstream as a low
geopolitical risk jurisdiction that's got a lot of endowment.

Midway Gold, as we have discussed previously, has the bulk of
its portfolio in Nevada. The Pan and Gold Rock projects are
open-pit heap leach deposits, which are grading just above the
average for similar deposits in Nevada. The company has drilled
intersections that have graded up to a gram of heap leachable
material that is 100% oxidized, getting recoveries of around 70%.
It's very easy to mine with low capital requirements. The
management team is perfectly capable of pulling it off. The
financing risk is always high for these sorts of companies
because they don't have any cash flow, but the capital amounts
required are nothing that's insurmountable. It has a portfolio of
projects as well, including the Midway project near Tonopah and
the Spring Valley project in Pershing County.

TGR:
In a recent news release, the company talked about re-assaying
the core from Spring Valley, which earned a higher grade than the
previous assays. The highlight was 218 meters of 2.7 grams gold.
Why was the core re-assayed? That's an unusual practice.

JM:
It's not unusual for this kind of deposit because it's very
coarse, free gold. Doing a small fire assay doesn't always pick
up the gold; metallic screen assays have been part of the assay
protocol for a few years and have been adopted by Barrick, the JV
earn-in partner on the Spring Valley project. I have a target of
$2.60 for Midway Gold and it was recently trading at about
$2.20.

TGR:
You evaluate risk on five levels: forecast, financial, valuation,
people and technology, and geopolitical or political risk. Can
you explain how you evaluate those?

JM:
Forecast risk is assessing the direction that the company says
it's going and comparing it to my estimates. And sometimes there
is no direction. You're on your own. For example, if I say the
mining costs for an open-pit in this area are going to be x, then
I'll use the comparables with a similar facility or development
project in the area that has been costed to arrive at our
estimate. If the company's statements are in the lower quartile
of that cost comparables, I may estimate a larger cost for the
company. I do the same thing for processing and capital
costs.

Financing risk is much bigger for developing projects because
they don't have any cash flow. They're going to have to go to the
debt and equity markets as opposed to having organic cash flow to
finance its development play. To quantify that in the model, I
bring in the financing component and dilute the stock to
compensate for future financing, if I believe it will develop the
project themselves.

The technical and execution risk is a lot about the
permitting, mining, and metallurgy of a project, among other
factors. I was looking at one project that had a new type of
floatation circuit that hadn't been used at the same scale this
company was planning. There was a risk component because we
couldn't be sure that the company could reproduce that scale.
There is a risk around mining. Can the company get the aggregate
to do a cement rock fill? What is the cost going to be like? Can
the company actually get the permit in that timeframe? What does
the critical path look like? I cannot mitigate risk, only attempt
to quantify it. Risk mitigation is primarily the management's
responsibility.

Political risk, such as mining in the Congo, for example,
means an investor would really need to be compensated with a
higher grade of metal.
Chalice Gold Mines Ltd. (TSX:CXN; ASX:CHN)
has a project with just over five grams of sheer zone-hosted gold
in Eritrea, a geopolitical risky country near Ethiopia. The risk
may be too much for some investors, but others who like that kind
of deposit grade may think that it can work because the
government there requires a lot of foreign exchange. Note the
company recently completed a successful negotiation with the
local mining authority.
Nevsun Resources Ltd.'s (TSX:NSU; NYSE.A:NSU)
Bisha Deposit is being developed there. The prospectivity of the
belt , Arabian Nubian Shield, is excellent and of interest to
majors.

TGR:
How do you quantify the degree of geopolitical risk in a
discounted rate?

JM:
The volatility for gold is less than for other commodities such
as oil, copper or silver, so the discount rate for gold tends to
be lower. We usually use discount rates of about 5%, but for
places like Bolivia or for some copper projects, we've used more
than 10%. The geopolitical component is there, but the commodity
plays a part in the discount rate.

TGR:
If the rate of return is still fairly robust and you use a
steeper discount rate, doesn't that make you sit up and take more
notice of an asset?

JM:
A project in a geopolitically uncertain area with a target about
100% over where it's trading can be something that investors are
willing to take a risk on. If a company can only show a 15% or
20% return in a very geopolitically risky area, then an investor
is probably not interested in that risk-return ratio. But that
return might be acceptable for Nevada or British Columbia.

TGR:
There can also be risks associated with a company's staff. Quite
frequently I hear about mid-tier companies poaching people from
juniors and a lot of staff shifting between companies because
there really aren't enough people to go around.

JM:
It's definitely an impact. Although junior explorers can operate
with a smaller group and require less manpower, they range from a
grassroots level up to drilling an advanced stage project. Once a
company starts into development, it needs teams of miners,
metallurgists, legal, compliance and so on. As a company moves
downstream and begins development, fewer people have that kind of
experience.

TGR:
Is that boosting costs? Is a lot of financing going toward
payroll?

JM:
I have noticed that the G&A of companies have been trending
higher especially for those who are closer to development and
need to ramp up their staff. Some compensation is rolled up into
stock as well. That's part of the impetus for somebody to leave a
big company with a decent salary to go somewhere with a lower
base pay, but the opportunity to make a significant windfall
through stock compensation on a successful venture. Some people
at larger companies who want to take that plunge are finding a
lot of opportunities in the junior sector.

TGR:
What are some companies with A+ management operating in low-risk
jurisdictions?

JM:
Midway has an excellent development and operations team led by
Ken Brunk, its president, chief operating officer and director,
who has built a lot of the asset base in Nevada for Newmont. He
also has experience permitting and working with local governments
and state regulators to get projects into production, as well as
doing the technical work. His background is metallurgy, which is
an important skill set as deposits become more difficult to
extract.

TGR:
If that's the case, it seems a lot of companies are going to face
staffing problems because that kind of varied expertise is in
short supply.

JM:
Yes, I think it is. When you have people with less experience,
there is the risk that it takes longer and it's not done as well
or not at all.

JM:
Bear Creek has not actually been shut down in Peru. It is still
looking at developing its Corani project, which represents the
lion share of its value, according to Chris Thompson who covers
the company on behalf of Haywood.

The former president of Peru, Alan Garcia, was very positive
about resource development including mining, oil and gas. He took
a stand in an area of southeastern Peru where he sought to allow
development of some projects that the local indigenous people,
the Aymara, were against. Garcia basically rescinded the original
decree to mine that area prior to the new president, Ollanta
Humala, taking office on July 28. Humala is planning a new tax
and/or royalty on miners. Peru remains a very prospective country
for gold, silver and copper, among other metals, and foreign
direct investment has had an important role in reducing poverty
over the past few years. So although I believe that mining
investment will continue-Newmont and Buenaventura have recently
approved the development of the multibillion dollar Conga
copper-gold project in Peru-an investor should lever him or
herself to companies that are comfortable permitting and
developing projects in this environment. My pick would be Minera
IRL; its senior management team predominantly resides in Peru and
is levered to the new geopolitical paradigm in Peru.

JM:
No. The Aymara situation is unique. While there can be issues
with the local communities in many mining jurisdictions, the
Aymara are a little bit different as they are an indigenous
population that have occupied that area around Lake Titicaca
before the Incas. Peruvians who are descendents of the Incas
(Quechua), on the other hand, have a long mining history.

For example, in other areas of Puno that are dominated by the
Quechua, Minera IRL spent 12-15 months negotiating with the local
community. The company's president, Diego Benavides, spent that
time working to nail down a deal to satisfy both factions of
locals, those who supported mining (farmers) and those who didn't
(artisanal miners). The company provided the local community with
a 5% free carry, which is unheard of with mining companies in
that area. That new and innovative solution in the end played a
role in the acquisition of the surface land use rights critical
for permitting. With Humala or without Humala, you just can't
move forward on a development project if you have a problem with
the local community.

We have made changes to our tax and royalty assumptions to
align with Humala's rhetoric. We benchmarked the tax and royalty
rates with other South American countries. We modified our
12-month target on Andean America to $1.10 based on increases in
taxes and royalties. The issues they have with permitting are
still very much a local issue and aren't necessarily impacted by
Humala's election as president. The process is still the same.
They still need the surface land use agreement with the
locals.

TGR:
Is the threat of a double-dip recession in the U.S. and debt
worries in Europe causing you to reassess some of your targets
and ratings?

JM:
A lot of those issues are global macro-issues that may be a
benefit for long-term gold prices going forward. We use those
trends to revise our gold prices that in turn influence our
targets and ratings. Another component of those trends is their
impact on geopolitical jurisdictions suffering from high
unemployment and economic woes, like in Spain, Idaho and
Michigan, which may now be more amenable to permitting. Also,
rising gold prices coincident with the need for tax revenue may
increase the risk of higher tax and/or royalty rates in some
jurisdictions on mining companies.

TGR:
Do you have any parting thoughts for us?

JM:
As we have discussed, risk and reward are two vital components of
any investment thesis but the sources of risk and reward vary
somewhat depending on the stage of development (exploration,
development and production). However, a few common themes would
be the quality of the underlying asset and the ability of the
management team to mitigate risk and deliver on its plan.

TGR:
Thanks, Joe.

Joe Mazumdar
is a senior mining analyst with Haywood Securities in
Vancouver. Previously he served as director of strategic
planning at Newmont Mining where he also held the positions of
director of corporate development and director of project and
financial analysis. Mr. Mazumdar also was the senior market
analyst (copper, molybdenum specifically) for Phelps Dodge from
2003 to 2005. He has held a variety of geologist positions with
other mining companies, including IAMGOLD Corp., North Mining
(purchased by Rio Tinto), Rio Tinto Plc, Mount Isa Mines
(purchased by Xstrata Plc) and Noranda Inc., working in South
America (Argentina, Chile, Peru and Ecuador for seven years),
Australia (Queensland for three to four years) and Canada
(Arctic, Yukon and S.E. BC for three field seasons), rounding
out ~20 years of industry experience. Mr. Mazumdar holds a BSc
in geology from the University of Alberta, Canada, an MSc in
exploration and mining from James Cook University in
Queensland, Australia, and an MSc in mineral economics from the
Colorado School of Mines.

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DISCLOSURE:
1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
None.
2) The following companies mentioned in the interview are
sponsors of
The Gold Report:
Orvana Minerals Corp., Revolution Resources Corp.
3) Joe Mazumdar: I personally and/or my family own shares of the
following companies mentioned in this interview: Carpathian Gold
Inc. (CPN-T), Midway Gold Corp. (MDW-V).
4) Haywood Securities, Inc. has reviewed lead projects of Minera
IRL Ltd. (IRL-T), Astur Gold Corp. (AST-V), Nevsun Resources Ltd.
(NSU-T), Bear Creek Mining Corp. (BCM-V), Orvana Minerals Corp.
(ORV-T) and Andean American Gold Corp. (AAG-V) and a portion of
the expenses for this travel have been reimbursed by the issuer.
5) Haywood Securities, Inc. or an Affiliate has received
compensation for investment banking services from Astur Gold
Corp. (AST-V), Midway Gold Corp. (MDW-V), Bear Creek Mining Corp.
(BCM-V) and Andean American Gold Corp. (AAG-V) in the past 12
months.
6) As of the end of the month immediately preceding this
publication either Haywood Securities, Inc., its officers or
directors beneficially owned 1% or more of Astur Gold Corp.
(AST-V), Midway Gold Corp. (MDW-V), Bear Creek Mining Corp.
(BCM-V).
7) Haywood Securities Inc. or an Affiliate has managed or
co-managed or participated as selling group in a public offering
of securities for Midway Gold Corp. (MDW-V), Bear Creek Mining
Corp. (BCM-V), Orvana Minerals Corp. (ORV-T) and Andean American
Gold Corp. (AAG-V) in the past 12 months.

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